The challenge of an EU PP at current bond yields

[frugal]

hi,

EU-PP is not better than US-PP.

But, for someone living in Europe I still couldn't find a better alternative!

Did you?

Regards and happy sunday!

[barrett]

This site will give you a good idea what belgo is experiencing in terms of bond volatility:

http://www.investing.com/rates-bonds/ge ... rical-data

The data is yield data and not price data, but the daily swings are dramatic (yield up almost 11% on 4/21 and down almost 10% on 5/3). Check it out during trading hours in Europe. These bonds have crazy volatility with major upward or downward moves in a matter of minutes on some days.

The moves are way more dramatic than what stocks and gold are experiencing.

belgo, how are you doing over there?

[belgo]

Hi Barrett,

Glad to see the forum is up and running again! Or was it only me had a "database problem"?  It has actually not been that bad in terms of volatility, I bought the 2046 Bund (DE0001102341) at a price around 145% (a yield of 0.84%) and the lowest it got was 139% a week ago or a loss of -3.5% (today the bond moved back up to 144%). The bond has a 23y duration.  The volatility has been similar to the price movements for gold and stocks so far.  All in all, it is nice to see how on most days the negative change in one assets is more or less compensated by a similar move up in one the two other (disregarding the cash for the moment which has a very stable yield close to zero).  Overall the package is 1% up after about 2 months.  Given the total uncertainty about the market direction at the moment, I am quite pleased with the PP, which prepares you for everything.     

[barrett]

We all had the same problem with the forum and have been stumbling around in the dark for the last five days.

Great to hear that German Bund volatility has not been too severe relative to gold and stocks. I mentioned that the data in the link I posted is yield data and not price data. The two are very different when yields are this low. It's good to have someone on the ground over there reporting back to the US. We might all be in the same ultra-low-long-bond boat at some point.

Hope the PP package continues to work over there!

[MachineGhost]

The moves are way more dramatic than what stocks and gold are experiencing.

Wow, that is wild!  There's probably no good way to deal with this other than correlated risk parity.  But I would suggest using the lowest volatile asset of the three as the anchor.

[MachineGhost]

Great to hear that German Bund volatility has not been too severe relative to gold and stocks. I mentioned that the data in the link I posted is yield data and not price data. The two are very different when yields are this low. It's good to have someone on the ground over there reporting back to the US. We might all be in the same ultra-low-long-bond boat at some point.

Price is the inverse of yield.  There's no difference.

Also, I think we've all become way too comfortable in viewing the PP assets as a hedge against each other on a short-term basis.  It's not.  Its a hedge against causative-economic factors.

[barrett]

Great to hear that German Bund volatility has not been too severe relative to gold and stocks. I mentioned that the data in the link I posted is yield data and not price data. The two are very different when yields are this low. It's good to have someone on the ground over there reporting back to the US. We might all be in the same ultra-low-long-bond boat at some point.

Price is the inverse of yield.  There's no difference.

The movements in percentage terms are not the same. For example, yesterday the yield on the 30-year bond was up .84%. The drop in price was only about .4%.

[MachineGhost]

The movements in percentage terms are not the same. For example, yesterday the yield on the 30-year bond was up .84%. The drop in price was only about .4%.

That makes no sense at all unless the price is accounting for the pro-rata yield.

I can conjure up the time series of a bond solely from its yield.  That wouldn't be possible if what you say was true.

On the off hand chance that it was, then the price change dominates, not the yield change.

[barrett]

MG, Perhaps we are talking about two different things. All I am saying is that if, for example, a 30-year bond sees its yield climb from 1% to 2%, it's yield has gone up 100%, correct? But it's price has not been cut by 100% (meaning the bond has not gone to zero).

[MachineGhost]

MG, Perhaps we are talking about two different things. All I am saying is that if, for example, a 30-year bond sees its yield climb from 1% to 2%, it's yield has gone up 100%, correct? But it's price has not been cut by 100% (meaning the bond has not gone to zero).

Going from 1% to 2% on 30yr is only a -21.40% loss.  So isn't it misleading hyperbole to talk about what the yield did instead of the actual bond price that you base your gains/losses upon?  No one defaults to thinking in terms of convexity when they see that a yield has literally risen 100%!

That must mean I overracted to those Bund yield changes also.   The reality isn't as bad as it seemed.

EDIT: Going from .01% to .975% results in a 25% loss; to 2.35% results in a 50% loss; to 4.75% is a 75% loss and to 8.02% results in a 90% loss.  I guess the question is how fast can yields rise and how fast will it kill you?

[barrett]

That must mean I overreacted to those Bund yield changes also.   The reality isn't as bad as it seemed.

Yes, I think we both overreacted. Here is my go to place if I want to see what US 30-year bonds are doing on any given day:

http://finance.yahoo.com/q?s=%5ETYX

That site also shows yield changes whereas a TLT link or Ryan Melvey's Stable Investing site will show price changes (I think Ryan uses the TLT data for the bond line on his "Intraday Interplay" chart). I'm just trying to understand how dramatic the daily moves are on those German Bunds.

MG, since you're so handy at calculating these things (I am not!), can you please tell me the price change in percentage terms for a 30-year bond when it goes from .838 to .929 as the German Bunds did on 4/21? I would really appreciate it.

[MachineGhost]

MG, since you're so handy at calculating these things (I am not!), can you please tell me the price change in percentage terms for a 30-year bond when it goes from .838 to .929 as the German Bunds did on 4/21? I would really appreciate it.

-1.54%